As the U.S. economy wobbles forward, recovering from the worst recession in a lifetime, state and local officials will soon be bombarded by hosts of lobbyists and advocates to restore services, programs and pay increases. Despite the pressure, public leaders must resist.
This economic recovery will not follow past patterns. The housing market remains a mess in many states, with foreclosures still prevalent in most regions of the country. Even with the stock market recovering 70 percent of its bear market losses from 2008, most investors have plenty of unrealized capital losses to offset profits on their income taxes, which wipes out that source of state revenue for at least another year. Thus, revenue growth will be sluggish, even as it’s positive.
Officials must keep in mind that they need to pay the past-due rent first, as the bills for old promises continue to mount. Almost all state and local governments deferred maintenance and capital equipment replacement in their efforts to save cash flow during the Great Recession. They must now play catch-up to replace aging police car fleets and road equipment, while fixing leaky roofs in public buildings.
Even more problematic are the swelling IOUs of the nation’s public pension funds and unfunded retiree medical benefits plans, which together exceed $2.5 trillion. The additional annual cost to amortize unfunded state and local government retirement benefits above current budget levels is roughly $150 billion nationwide, or 15 to 20 percent of most state and local government payrolls on average. Unfortunately, this is in addition to the announced pension cost increases already communicated to public employers.
Most state and local leaders realize that they must refrain from new spending to pay these past-due bills. Elected officials must learn the power of no: the resolve to tell constituents and employees that they cannot vote in good conscience for new programs, more employees or pay raises for current workers. It’s no different from telling your recently graduated son that he can’t let the rent fall past due in order to make a down payment on a shiny new car, despite what he would like to do.
Labor unions are a case in point. They are not accustomed to hearing public officials say that there won’t be pay raises for years to come unless and until pension and retiree medical benefits contributions are budgeted properly. That has been compelling union leaders to come to the bargaining table with concessions in benefits and accept higher levels of employee contributions toward their own benefits.
Another strategy for public managers and elected officials is the earmarking of budget surpluses for fiscal restoration. As the economy gathers upward momentum, the odds favor tax revenues’ overshooting last year’s conservative budget estimates, which will produce year-end budget surpluses in 2011 through 2014 -- if this cycle follows a normal pattern of economic expansion. Wise use of these budgetary surpluses is a key strategic policy that elected officials can adopt to ensure prudent financing ahead of the next recession.
The power of no includes a commitment to devote year-end budget surpluses to permanent balance-sheet improvements. It makes sense to devote one-third of all forthcoming budget surpluses to address underfunded retiree medical plans and pensions until the budget can contribute annually the required actuarial contribution.
As part of a responsible labor-relations policy, public leaders could earmark 10 percent of budget surpluses for one-time contributions to a deferred compensation plan. That money would reward diligent employees who accept benefits cuts, salary freezes and higher employee contributions to their retirement plans. Call it “nonprofit sharing.”
The remainder of the budget surplus should be formally earmarked to a rainy-day reserve fund (which governmental accounting standards now formally permit). That way there will be money set aside to avoid future layoffs, furloughs and pay cuts during the next recession.